Happy Monday Morning! As expected, the Bank of Canada held interest rates at 5% for the second consecutive time. BoC’s Macklem flagged everything we’ve been highlighting in this newsletter for several months now. Weaker economic growth and a recent surge in global bond yields is doing most of the tightening for them. Adding, “The path to a soft landing is narrow. In our new projection that path is narrower.” No doubt. Monetary policy is working, households are pulling back in the midst of surging interest rates. Household loan growth is running at its lowest levels since 1983! We can also see demand being crushed for new mortgages. Mortgage loan growth is running at its lowest levels since 2001. It is therefor rather perplexing that house prices haven’t fallen further. This has perplexed the BoC as well. “Normally, house prices move pretty lockstep with interest-rate increases,” Bank of Canada senior deputy governor Carolyn Rogers said at a news conference last Wednesday. “As interest rates come down, house prices go up a bit. And they’ll come off as interest rates come back up.” “We’re not seeing the decline in house prices that we would expect,” she continued, adding that there is a

Happy Monday Morning! At the beginning of the year I was part of a real estate pannel with REW on the state of the Vancouver housing market. On stage, in front of a live audience, the moderator asked me for my forecast for 2023. I promplty noted at the time that “we’re going to have a year of volatility.” And that’s exactly what it’s been. This year has been marked by a record low in home sales, followed by a record low in new listings, and inventory. Against all odds, prices ripped higher in the spring. This prompted the Bank of Canada to hit the panic button and start hiking rates again. Bond yields have followed suit, pushing mortgae rates higher too. Sales have stalled once again, and prices are now following suit. To put it lightly, it’s been nothing short of a roller coaster ride in 2023. Recent stats from CREA highlight the whipsaw emanating across the nations housing markets. While home sales were officially up 1.9% year-over-year in September across Canada, they were still the third lowest in twenty years. Buyers are squarely on the sidelines with very little urgency considering mortgage rates are hovering well into the 6% range

Happy Monday Morning! The housing crisis in this country gets a lot of attention, as it should. Fixing it, however, is proving to be rather difficult. Over the past several years we have attempted to beat demand over the head with a blunt instrument. The list of policy measures include, a foreign buyers tax, empty homes tax, a speculation tax, an increased property transfer tax on luxury homes, increased property tax on luxury homes, a foreign buyer ban, and a mortgage stress test just to name a few. You’ll notice there’s a recurring theme here and it has to do with taxes. We’ll circle back on that shortly. It turns out killing demand has proven rather challening. Especially when the feds are hellbent on maintaining current levels of immigration. Canada’s population grew by 1,050,000 in the second quarter, the highest rate of growth in a single year since 1957. So now we are going to try the supply side. According to CMHC, Canada needs about 3.5 million additional housing units by 2030 to restore affordability. But what the hell does that even mean? It means over the next six years we need to average 583,000 housing completions per year. Over

Happy Monday Morning! Headline inflation ripped higher than expected this week, jumping back up to 4% for the month of August. It turns out Chrystia Freeland’s premature victory lap marked the bottom back in June. There’s a lesson here in base effects, you’d think her economics team would have tapped her on the shoulder back in June. Perhaps they were on summer holidays. While some were asleep at the wheel, others were crunching the data. Several months ago we highlighted some research from our good friend Ben Rabidoux of Edge Analytics. “We have more challenging base effects on deck given the low monthly prints from August and September 2022 which will drop out of the annual data set over the next 2 months. In fact, if CPI rises a mere 0.2% each month for the remainder of the year, we’ll end 2023 with an inflation rate north of 4%. And if CPI averages 0.3% monthly gain (in line with the average over the past 6 months), we’ll end up with an inflation rate pushing 5%.” The concerning thing here is not that Ben was right, but rather how quickly we got back to 4%, and if current trends hold the Bank

Happy Monday Morning! Over the past several months we’ve been highlighting the marked slowdown in residential building permits, a leading indicator of future supply. This is what happens when the cost of capital doubles, and in some cases, triples. This is a disaster in the making for a federal government insistent on maintaining immigration targets, and in fact far exceeding them, with 1.2 million new migrants moving to Canada last year. Sliding in the polls, the Liberal government has been in full panic mode. With their feet to the fire we finally got some change. Just this past week the Liberal government announced the removal of GST on purpose built rental units. They had proposed this change back in 2015. As they say, better late than never. So effective immediately, this change increases the GST Rental Rebate from 36% to 100% on all brand new rental construction consisting of a minimum of four private dwelling units. In other words, a 5% savings for rental developers, which will be enough to revive some projects that otherwise never stood a chance in this economic environment. Hopefully this allows the rental constuction boom to continue. You’ll notice rental construction took off in the

Happy Monday Morning! The Bank of Canada moved to the sidelines once again, appeasing premiers in BC & Ontario who publicly pleaded with the BoC last week. It’s no secret these two provinces have the most to lose, their coffers largely built on a highly levered housing market, but we’ll get to that in a second. Here’s the coles notes from Tiff Macklem post pause. “Monetary policy is working to bring inflation down—and we are encouraged by the progress we’ve made so far. Consumer price index (CPI) inflation was 3.3% in July, roughly in line with what we expected in our July Monetary Policy Report. Our 2% target is now in sight. But we are not there yet and we are concerned progress has slowed. Monetary policy still has work to do to restore price stability for Canadians, and we are committed to staying the course.” In other words likely no more hikes, but also no cuts. That’s no bueno for Canadian households which are finally showing signs of buckling under mounting interest rates. When Sarah Dueck and her husband bought a new house in Langley, B.C., two years ago, interest rates were low. They had little doubt they could pay

Happy Monday Morning! A few weeks ago we summarized the cabinet shuffle, arguing the replacement of both the housing minister and immigration minister was simply rearring deck chairs on the Titanic. When new immigration minister Marc Miller was repeatedly questioned about rampant immigration putting strains on infrastructure and housing, he noted, “I don’t see a world in which we lower immigration targets, the need is too great … whether we revise them upwards or not is something that I have to look at but certainly, I don’t think we will lower them.” Fast forward a few weeks and Miller is suddenly concerned around private sector colleges abusing the immigration system. So what changed. Why the sudden change of heart? It turns out, according to one of Canada’s most esteemed economists, we have been grossly undercounting non permanent residents. CIBC’s chief econmist, Benjamin Tal, notes the government estimate of the number of non-permanent residents in the country in 2021 was around one million. But his analysis found there were closer to two million non-permanent residents. A ONE MILLION person rounding error. Stats Canada is now rushing to fix the issue, saying it will introduce a “revised methodology” for counting non-permanent residents starting next month.

Happy Monday morning! The Federal government is ramping up the noise amidst dismal polling numbers and a federal election only two years away. We had a cabinet shuffle just a few weeks ago, which included the immigration minister becoming the new housing minister. This week they arranged a housing retreat in Prince Edward Island to brainstorm the path forward. After a barrage of outspoken economists, and a plethora of media attention, the immigration file is finally getting some attention in Ottawa. “The international student program has seen such growth in such concentrated areas that it is really starting to put an unprecedented level of demand, in some instances on the job market, but given the economic conditions we’ve been living with for the past couple of years, you see it in a more pronounced way in the housing market,” said immigration minister turned housng minister, Sean Fraser. When asked about putting a cap on such enrolments, Fraser said it’s one of the options the feds are willing to consider — albeit not at this stage in the game. “I think we should start by trying to partner with institutions to understand what role they may play to reduce the pressure

Happy Monday Morning! Headline CPI inflation surprised to the upside this past week, pushing back up to 3.3% and well above market expectations of 3%. However, those who have been following along here will know the importance of base effects. When headline inflation fell to 2.8% last month we were quick to highlight some research from our good friend Ben Rabidoux, in which he noted, “If CPI averages 0.2% (or 2.4% annualized.. more or less in-line with the Bank of Canada’s target), CPI will be pushing back towards 4% by year end.” Except we didn’t get 0.2% we got an absoloute whopper at 0.6%. The bond market immediately launched yields higher, pushing the all important 5 year Canada bond to it’s highest levels since the summer of 2007. Markets are now fully pricing in one more rate hike from the Bank of Canada before year end, with about a 30% chance of that happening on September 06. In other words, there’s no relief in sight for Canadian households. The longer interest rates stay elevated, the more pain cometh. Remember the mortage renewal wall hits hard in 2024 and 2025. The clock is ticking, and political pressures are mounting on both the

Happy Monday Morning! It’s been a few weeks now since the Trudeau government shuffled his cabinet ministers, naming both a new housing minsiter and a new immigration minister. However, as we discussed a few weeks ago in my piece, Same Faces, Different Places, nothing has fundamentally changed. These are the same people, and the same policy ideas. We are simply rearranging the deck chairs on the Titanic. Despite growing concerns over the levels of immigration in this country, one that is increasing social tensions, overloading public infrastructure, and exacerbating a housing crisis, new immigration minister Marc Miller is doubling down. “I don’t see a world in which we lower immigration targets, the need is too great … whether we revise them upwards or not is something that I have to look at but certainly, I don’t think we will lower them.” Further adding, “Without those skilled workers coming from outside Canada, we absolutely cannot build the homes and meet the demand that exists currently today.” In other words, we need more immigration in order to build the houses to accomodate the new immigrants? There’s just one problem, according to the IRCC (Immigration, Refugees and Citizenship Canada) less than 2% of new

Happy Monday Morning! The Trudeau liberals shuffled the deck this past week, replacing several key cabinet positions. Amongst those moves was a change of the housing minister. Ahmed Hussen is out, which should not come as a surprise given house prices have doubled under the current government, with an election not far away. Hussen’s track record since he took the job in 2021 has been uneventful to say the least, and his tone-deaf op-ed a few weeks ago was the final nail in the coffin. If you haven’t read the op-ed i’ll summarize it for you here. Don’t blame us, and don’t blame the municipalities. Zero accountability. Anyways, we now have a new housing minister. His name is Sean Fraser, the same guy in charge of immigration. The same minister who ramped up immigration to mind blowing levels in the midst of a housing supply crisis. He is now responsible for fixing the problem he helped create. Yes, the arsonist has become the firefighter. Canada’s population boom has strained both public services and housing. According to the economics team at TD, Canada’s 1.2 million population expansion over the past year is more than double the pace in 2019 and in the years that

Happy Monday Morning! CPI headline inflation came in lower than expected this past week. Markets were calling for 3% and we got 2.8%, a pleasant surprise and back to its lowest levels since March 2021. Perhaps the 475bps of rate hikes are finally starting to work their way through the system? We are back within the BoC’s target range of 1-3%. If you strip out mortgage interest costs, which were up 30% year-over-year and are entirely self-inflicted by the Bank of Canada, then headline inflation sits right at 2%. And yes, I know about gasoline prices. Please don’t misconstrue this as problem solved. We all know inflation has been pervasive over the last couple of years. It has wrecked havoc on the bottom half of society. That price growth is now baked into the cake, and prices are not going down, they’re just going up a lot less than they used to. However, if you’re skeptical about government inflation data then i’d encourage you take a look at Truflation.com. Inflation peaked at 11% in the US and is now running at 2.3%. Central banks have already over tightened, they just don’t know it yet. I wouldn’t be surprised if inflation